Johnson Controls International plc (JCI) Earnings Call Transcript & Summary

We're going to continue with the Wolfe Research Industrial Growth Technology Conference. This is an event where we speak to highlight and explore disruptive next-generation technologies around industrial complex. And within that realm, the smart building certainly is one of the more exciting opportunities that we see within our coverage universe. And we don't think there's a better company positioned in that world than Johnson Controls. So very pleased to welcome to the stage, Mike Ellis, Chief Customer and Digital Officer, and Vijay Sankaran, who is VP and Chief Technology Officer of JCI. And of course, Antonella Franzen, VP of Investor and Corporate Communications. So -- Antonella thank you very much for your time and Antonella, to you and then perhaps we can go through that.

Thanks, Nigel, and thanks for having us. As many of you know, we did just report our Q4 earnings and wrapped up a really strong fiscal year, meeting or exceeding all of the commitments that we made. Although this is in a very challenging environment, I would say we've been navigating very well. We've also initiated our fiscal '22 guidance with strong top line performance, strong margin expansion and, I would say, very strong EPS growth expected in our fiscal '22. In terms of our strategic focus on validating growth, you're really starting to see that in the market where, clearly, the increased pace of new product introductions that we made, we are transforming our service model with digital. The vectors of growth that we talked about many times are really going to be creating an exciting decade ahead for us. We also took a few important steps forward in our strategy as a smart building solutions leader, really scaling our OpenBlue and expanding our digital leadership. And with that, as you mentioned, we have Mike Ellis and Vijay with us today and really want to have the opportunity to let them share a bit more about Johnson Controls and all that we're doing. So with that, Nigel, I'll pass it back over to you.

Great. Thanks, Antonella. So I thought it would be a good place to start the conversation by just talking about the smart building market. Our impression is that the building technology market is still very old tech, quite -- still quite analog, unlike services, Vijay, where you come from, which is very advanced in digital solutions. So just wondering how do you view the penetration right now of smart buildings? And what do you think that can go over the next several years?

Yes. So maybe I'll start, Nigel, I mean I think we're rapidly evolving, right? And I think it's really been driven by the customer base really wanting to focus much more on macro level outcomes like sustainability and energy efficiency much more holistically at a campus or a building level. And as you know, Johnson Controls has long had leadership around individual BMS systems like security or fire or controls. And now what our customers are really looking for, and we're seeing this much more in the types of RFP requests that we get, the types of meetings that we have with executives, is much more of a holistic integrated solutions with that take the different inputs from those different BMS systems, integrate them into a single software platform to deliver outcomes around energy, sustainability, safety, healthy, which is really where OpenBlue comes into play. So I still think that we're in the early innings of the ballgame, but I think you're going to see really accelerating growth in the space over the next couple of years.

Yes. And just to add to that, I think in Investor Day, we valued it at around or sized it around $25 billion in terms of intelligent smart buildings. And as Vijay just said, it's early days. But the outcome-based objectives of intelligent smart buildings is what's really key here. And we -- I don't think I know a C-suite customer today that is not thinking about how to activate their net carbon zero or sustainability footprint and agenda with technology. And so the cornerstone, of course, to smart buildings or intelligent buildings is that technology itself, as Vijay was saying, extending that historical footprint that you might associate with the buildings industry like controls, security, et cetera, and really bringing to life that connected building, all the systems within the building, the smart edge and cloud-based applications that really help you get there.

And I guess the natural question would be if we start to see the acceleration, which geographies or customer verticals are leading the edge on this? And my perception would be that perhaps we see more interest in Europe, perhaps, but you tell me if I'm wrong there, where you're seeing the most acceleration.

Yes. So maybe I'll jump in first, Vijay. For us, we're seeing huge interest in, yes, Europe and also Middle East around building out the greenest buildings, the most sustainable footprint, et cetera. We're also seeing a really strong interest in APAC as well, so China as well as the rest of Asia Pacific. And that doesn't mean that North America isn't strong. There's a lot of activity going on. But I think the runway perhaps has been a little longer in EMEA and APAC focused on smart buildings and how that might deliver those outcomes of net carbon zero.

Okay. That's great.

And I would add to that, Nigel, and say that sustainability and energy efficiency are at the top of everybody's agenda now going forward. And so I think for us, the leading indicator is more of the, hey, we need to understand more about what the architecture of the future smart building looks like. I would also say we see a lot of new builds really being a target focus area for smart buildings, but then we also see a fair share of -- I want to get to net zero and what do I need to do in order to swap out my equipment and put software at the edge, so I can do the kind of optimizations that I need to achieve net zero. So we're seeing the -- I think the secular trends really reflecting much more of an emphasis around sustainability and energy efficiency across all the regions.

Even to add an example to that maybe, Nigel, if it helps. We did a press release around the Department of Energy and Water in Dubai in one of the most -- their whole objective is how do we build the most green building in the world for government. And so you look at an aspiration like that and, of course, it's going to be filled with technology to create that amazing sustainability footprint yet deliver against great new experiences. Now that's a new build like Vijay was just saying. We also did a press release recently with a company called Derwent in London, and it was all about how do we help them modernize the current building stock and footprint, the buildings that are out there today in London and really bring to bear that connected edge and connected equipment technology to optimize the use of technology in those buildings and deliver better outcomes and better energy conservation. So it does cross the gamut of installed or current building stock as well as new building.

So you mentioned, I think, Mike, the conversations now with top level executives, and the conversation is very much at the C level in the boardroom, not necessarily with the building managers. What do you think are the key drivers? I mean, obviously, we've got COP26. You've got these very high-level initiatives. But is it really coming from environmental reporting, [ single ] reporting in these covenant, is that really what's the key driver that you see behind a lot of this retrofit opportunities?

Yes. I would say it's a couple of things, and I think this would tee up a discussion with Vijay on the technology itself on the economics of it. But in particular, certainly, the sustainability initiatives that are going on worldwide, COP26, et cetera, green building initiatives that I'm speaking at later this week in India and others where it is become absolutely paramount that we understand how we can make more energy-efficient our assets, our buildings. And I don't know a CEO yet that is not setting goals for their company, Fortune 1000, 2000, would have you, in trying to understand how they make that real and start to deliver against it. The real magic starts to occur Nigel, when we talked to -- and this is an interesting coming together of C-suite -- we talked to the head of Global Real Estate for these companies, who is typically not technical but have been very asset-focused and property-focused. And we also start to include in that discussion, the CTO or the CIO of that firm. And we help them actually start to bridge the gap about how do you activate using technology, the modernization of these buildings and start to achieve these outcomes driven by that commitment the CEO is making in things like COP26. And just reflection real quick. I'm honored to serve on committee, the Chief Digital Officer Committee for the World Economic Forum. But interestingly, I'm also on the Committee for Global Real Estate at the World Economic Forum, and they're 2 totally separate groups. The CDO committee, their #1 priority -- and I swear, I didn't volunteer this to them. Their #1 priority is how do I activate the sustainability agenda of my company for my CEO using technology. And the #1 initiative of the Global Real Estate Committee, totally separate group, different individuals, is how do I use technology to activate and modernize by building stock to start to really address this. The last thing I'll mention and Vijay to jump in is, the cost of compute and technology is also reducing dramatically. So it used to be 5 years ago, IoT technology at the edge was actually still fairly expensive, and your functionality in capabilities was also highly limited, and that's changed in a big way.

Yes, absolutely. I mean, I would say, Nigel, just to build upon what Mike says, there are some very specific outcomes that I think have attracted the interest of senior level leaders. So number one, we've demonstrated that when you leverage OpenBlue software within the building, you're looking at 20% to 30% energy efficiency savings, right? Number two, when you do more industrial monitoring for things like chillers, for example, using our OpenBlue software, you have a significant reduction in terms of major failures and downtimes and you can proactively respond to that. Number three, we're seeing smart orchestration in terms of operating efficiencies, especially in things like smart patient rooms in health care, where you have a lot of new rehab centers and hospitals that are launching that want to do a lot more automation and orchestration. That's a use case that OpenBlue delivers. So for us, it really orients itself around a number of specific use cases. And now with the technology in our OpenBlue platform, we're able to show how we can basically integrate both Johnson Controls and non-Johnson Controls technologies at the edge in order to be able to deliver those outcomes. That's the -- when we pitch those kinds of capabilities to senior level people, and we -- especially the CIOs and CTOs, we can do it in a secure way. That's really what piques their interest as we think about these opportunities.

Right. So I mean, one of the barriers that we were clearly seeing, especially at the time of the merger between JCI and Tyco, was this kind of gap -- this incentive gap between landlords and tenants, whereas tenants might want to save on energy and be good [indiscernible], whereas landlords might not have the same incentives. And now we're starting to see some divergence in marketability and rents for our smart buildings versus the alternative. Is that gap not large enough to actually matter?

I think that the perception of value of the building and you put it well, Nigel, the smart intelligent buildings are starting to create a higher lift in terms of tenancy and being able to lease space because of the attractivity of that space itself and also that it is cognizant to the sustainability footprint. And as Vijay just said, also could be purpose-built in terms of certain types of capabilities for a particular industry as an example, health care, et cetera. And I think the value equation is changing and is -- that perception is out there in the marketplace today. People are starting to see this. And I think all of the major property management firms are coming to us saying, "Help us how to think about this. How do we modernize? How do we create new experiences in the buildings? How do we create new impactful industry attractive approaches to this real estate asset? How do we build for experience and software experience in dynamic spaces as people come back to work and how does that all relate to the value of the building, ultimately, and higher tenancy rates," right, which is how they measure themselves.

You talked about pre-market drivers here, but government regulation plays an important role here as well. I think we've seen how effective it can be with the European kit pump regulations as a driver there. What kinds of regulations or codes or incentives do you see that encourage you to think that we might see government play a possible role here with the adoption rates?

Well, I would say that, Nigel, everything that we see and we have Katie McGinty, who leads our -- she's our Chief Sustainability Officer and leads our government relations work, at every one of our executive committee meetings, is talking about regulations around sustainability that are going to basically -- are again aligned to the secular trends around upgrade, incentives, around healthy air quality. And we're seeing that literally across every single region with Europe probably being in the forefront of that accelerating set of trends. But in the United States, it's a little bit different. It's more incentive-based, especially with the Bipartisan Infrastructure Act that was recently signed. There is significant stimulus that's associated with energy efficiency in that. And again, we only see more of those tailwinds in the horizon all across the globe, especially coming off of COP26 and then also just looking at the carbon emissions commitments for mid-century and earlier. We're seeing more and more of an interest in pulling back those commitments. And I would say even more than government and local regulations, we're seeing that at the corporate level as well in terms of acceleration. So we fundamentally believe that the tailwinds and all of those are behind us.

Yes. Great. So we're -- I think we're 17 minutes in here, and we haven't asked one question about OpenBlue, let's go to that. So I think OpenBlue has been commercial now for just over 1 year, if I'm not mistaken. What are some of the major landmarks that you highlight over the past 12 months or so? And how has the platform evolved? I know you highlighted in the Investor Day the stacks and how it works at a very sort of high level, but how are the sort of the apps and the capability evolving?

Yes, absolutely. So the way that we have envisioned OpenBlue, and this is the way that the platform is evolving is that we have an open edge connectivity. So that's a piece of software called OpenBlue Bridge. And right now, OpenBlue Bridge runs on a box and basically can connect to both Johnson Controls and non-Johnson Controls devices at the edge. So imagine things like sensors and cameras and control systems, that you can go in, do auto discovery, map those points and begin to basically collect data through that, stream it up to the cloud. That data gets stored in a digital twin structure, which is think of it as update data-based representation of the space. So where are your cameras, where your chillers and then also the data points that get collected from that space. So what's the temperature changes over time, what's the humidity, what's the air quality? And then we've done partnerships with companies like Kaiterra that collect indoor air quality monitoring, especially now we're doing more with like pathogen sensing and things like that. So what we -- how that part of the platform will evolve is twofold. Number one is the number of integrations that we have at the edge in terms of being able to support every single aspect of the building's fundamental capability, whether that's lighting or audio, blinds, different types of sensors in the space, OpenBlue will support all of those integrations. Number two is that we are building our OpenBlue Bridge Edge software as a software agent in a modern containerized architecture with a lightweight independent container that can be deployed on any device. And so you can imagine it going directly onto a chiller, directly on to a camera, being able to connect those devices directly to the cloud with the same secure capabilities that you have right now in the OpenBlue Bridge on the box. Number three is intelligence at the edge, and we believe that this is a really big differentiator for us. We really believe in the power of the edge and intelligence at the edge. And so what does that mean? If you think about cloud and collecting all of this data from, let's say, a chiller, pushing it up to the cloud, doing analytics and then being able to diagnose a condition on chiller versus doing it on the edge where you've developed a model and then you push it on to the edge and as the chiller is operating, you're basically detecting anomalies in real time, you're basically able to send a telemetry-based alert to a technician to say, "Hey, there's something that's just out of range right now with this particular chiller while that's running -- that intelligence is running on the edge." That's a capability that we're going to be deploying fairly shortly here. And that's going to be #1 game changer for us, we believe, in terms of focusing intelligence on the edge. The second piece that is really something we just launched recently with our OpenBlue performance advisers, what we call multi-solve. And so multi-solve is something you can think of very simply as you have a set of variables in a building environment, let's say, air quality, energy efficiency, purification as a different choices that you have to make in terms of optimizing the space. Based upon how many occupants might need in the space, what multi-solve does is it allows us to take all of this data, put it into one single repository and give you that what-if type of scenario modeling and analysis that is going to help us in things like sustainability and decarbonization. That's something that we just launched was brand new, and we see that as being something that will continue to evolve going forward. And that kind of capability is essentially what our net zero adviser solution is also going to be predicated on, which is if you think about net zero adviser, it's basically your digital adviser to how do you get to net zero at some point in time. And so let's say, you benchmark how much carbon you're emitting at any point in time. And then based upon the types of industrial equipment that you have in the space, what your upstream energy sourcing is being able to do sort of what-if scenario-based analysis literally using a multi-solve type of a model to say, "If I increase my solar, if I increase my load shaving, if I upgraded my chiller, what impact is that going to have on the carbon emissions in the space?" So that's another capability that we're going to have here in the next 6 months. The other one is a visualizer, which is you can actually see every aspect of your building space in a 3-dimensional image, which we're leveraging some of Autodesk's capability and actually working on a partnership with them, where you can actually go in and look at the space, click on a camera, click on an object in telemetry, be able to actually understand what's going on in that. So that's something that is going to be, I think, really important as people want to look at their space holistically. And then the other big area of growth is going to be around other workflow integrations in the cloud. So if you think about the flow of how a building space works where you dispatch a service technician or maybe you have an employee coming back to the office, and they want to basically do the digital twin on a mobile device and say, "Okay, which room do I want to have this meeting in," and then have a third-party integration into outlook, for example, to automatically create a meeting. We're going to do a set of third-party integrations with, you could say, enterprise space management and things that it takes to basically manage the enterprise on our cloud. So we believe that as we build out those kind of integrations, the workflow for those personas that occupy and manage the building will be really optimized with the data that we're ingesting from the building as it is. So everything is predicated on that fundamental OpenBlue data platform, and then we add AI and ML and different kind of workflows and multi-solve modeling on it to create those outcomes for our customers.

Great. That's a very thorough answer there. The main expertise to some of it comes up a lot in the conversation and obviously, JCI is #1 in cybersecurity, #2 or whatever commercial HVAC, on the top BMS players, how important are those -- the main expertise areas? And I'd be very curious how important is being a leading BMS player to being a leading smart building solutions player.

Yes, I'll start. I mean I think it's absolutely a differentiator for our business is the breadth and strength in our portfolio but also in our go-to-market expertise, right? So we feel like having the field business that really understands not just our products but all the other products in the landscape, how those get configured on site, how they can be connected to the cloud and enable that connectivity plus the product leadership where we have expertise around green technologies and chillers where we can actually add that OpenBlue connectivity into them plus OpenBlue in and of itself. That's what creates in our opinion, the turbo machine that will enable us to have the fully smart autonomous building in place. None of them works independently as well without the others. And I think that's really what the strength and the strategy is.

Yes. I mean think of the breadth of the portfolio, as you just put it, Nigel, it's unparalleled in the industry, right? There's no other vendor solution provider that has that depth of capability across those domains that you described, fire security HVAC controls and digital platforms and solutions. And so all the things that Vijay said, but even adding to that, creating intelligence off the combination of those different domains is not easy. And so our long history of understanding how each of those domains actually operate and with the makeup, if you will, the data itself to interpret it and create a pathway to those outcomes that we've been talking about today is absolutely critical. And so there's lots of start-ups around the world that are applying AI to various energy-saving capabilities and buildings and other technologies. What we found is in talking to them, partnering with them, working with them, et cetera, is their depth of understanding of some of that data and the interpretation of that data is not that great because many of them just haven't had that breadth of, call it, 20, 30, 50 years, of understanding how these systems actually work. So we have that as a cornerstone to our advantage, and applying those digital platforms like OpenBlue to this now and pulling that data together, interpreting and making sense to deliver against those outcomes is what our real core advantage is here. Really exciting.

Yes. And just to add to what Mike said, I mean, it's also the customer problem set, right? I mean, by having the domain leadership and having sort of the go-to-market, we understand what the pain points are in -- with our customers. For example, we have a major account in Asia Pacific, where they have literally hundreds of BMS systems but they don't want to have to dispatch people out to each individual business building to basically measure energy or being able to triage those systems. They want a centralized platform for it because it's a big OpEx save for them and being able to look at the energy footprint holistically. By knowing that that's a problem for them, we're able to design OpenBlue in a way that it specifically is oriented around solving those problems holistically as a platform. So I think that's really where the strength of the portfolio and the field comes together for us.

Yes. One thing you can add to it is layering on the service capability. So we're also -- when you think about us as a vendor and a supplier, our service portfolio is also unparalleled for the buildings industry. And that includes servicing non-JCI and Johnson Controls equipment. So our ability to make sense of the information and data that's coming from non-Johnson Controls equipment that happens to be in the building of our customers is really critical to that game. So we can help them with the entire footprint of that building, not just the Johnson Controls components of it, that's game changing for these guys.

So you mentioned there, Mike, the service franchise is critical to winning, if you will, being shared. But then you've also highlighted OpenBlue as a driver of service acceleration, so it's almost like a virtuous cycle. Why does OpenBlue accelerate growth? I mean, I understand that you're offering more solutions. But does it mean that you basically have the service and maintenance, if you will, you've taken away from a sort of a mechanical price-based decision to a much more holistic solution. Is that how you drive growth?

Yes. I mean it's one of the elements. I mean the core is you want to connect everything you possibly can in the building so that you have real-time visibility into what's going on. And if you can create that environment of real-time visibility, you've also created the opportunity for real-time actionability. So that might mean instead of rolling a truck to go diagnose something that you can do it digitally and understand, as Vijay was giving the example, a technician might be looking at a simulation of some equipment and building via digital twin back in the Johnson Controls' office. So what does that do? That not only helps our possibilities of delivering the solution remotely, but also increases the speed to solving that customer's problem reduces probably the overall cost to serve that customer for Johnson Controls. But most importantly, for that customer raises the value of their building assets because they're live and running and again, securing a better energy footprint, better efficiencies and capabilities, et cetera. So connecting all of those devices and starting to pull data and make it at a real-time approach to service is really core and a key heartbeat to what we're doing as a business. A great example of that is we talked in the Investor Day around connected chillers. Well, just in that case, we're able to see what's actually happening in that chiller, what their diagnostics are, how we might be able to fix it remotely, if we do roll a truck that we have the right part or component to make sure that we fix it immediately and also to real-time ongoingly monitor these devices, so you can give a real footprint as to what's going on. Lastly, around this whole process is to understand how your customer operates. And so your ability to create as-a-service opportunities for us as a company, but also serving the customer real time where their customer satisfaction is based on our ability to react quickly and also do so efficiently at the right price point. Digitally -- digital itself at OpenBlue itself is the cornerstone to making that real.

Yes. And if I could just add to that, Nigel, I mean, I would say the growth boils down to 4 fundamental areas. Number one is you look at digital subscriptions, right? So as these companies decide that they want to have net zero monitoring or they want to do energy monitoring or industrial equipment monitoring, it's not a onetime, "Hey, come in, do my chiller vibrational analysis," and then go away. It's like everything else that we do in society. It's an ongoing -- it's essentially, you could think of it as like the biometric of a building, right? So we've seen multiple models with different kind of smart activity trackers and stuff that are on a digital subscription model. We're basically the smart activity tracker for buildings now. I would say number two is, it comes down to product differentiation. So as we've built OpenBlue capabilities directly into the product, that's actually a source of product differentiation. So you take our green technology leadership, add it with the product leadership that we have with OpenBlue and then you have intelligent products, which we believe will be an additional lever to growth. Number three is really those service offerings. So things that we could not do before we're able to do now. So think about IoT, cybersecurity assessments as a service, for example. Without OpenBlue, that would not be possible because now we can monitor all those devices, be able to detect anomalous activities get the edge and basically say, "Okay, we're going to come in, do a benchmark in baselining on your IoT cyber or on your industrial monitoring architecture." There's a whole new dimension of service growth that is in place. And then number four, even on the service OpEx efficiency, you look at it, and we have billions of dollars in PSA, Plan Service Agreement contracts -- But typically, those are something fails and then you dispatch somebody out to the field and they go fix it, right? Now with OpenBlue, you have remote monitoring services where the efficiency of dispatches is significantly improved. So you could do over-the-air monitoring, you can do remote triaging that's potentially based in places like India and other lower-cost regions. And then the amount of dispatches are reduced significantly. So our field is also going to become much more efficient through OpenBlue. So I think you're seeing both a mixture of top line and bottom line levers that is going to lead to expanded revenue growth as well as margin expansion.

We're out of time here. You're always worried about running out of questions to start these chats, but you're always out of time. So I really enjoyed this conversation. Hoping to squeeze one more on partnerships but I feel that could take us 5 minutes over time. So let's stop there. Thanks, Mike. Thanks, Vijay. Thanks, Antonella, for the time. I appreciate the conversation and good luck blowing this thing up.

Thank you.

Thank you so much, Nigel. It was a pleasure to meet you.

Thanks, Nigel.